For years, young gamers have increasingly put aside their Wii wands for smartphones and tablets. For years, console maker Nintendo has stuck to those wands and to the strategy that made it one of the world’s top game makers—selling consoles and handhelds linked to games featuring the mustachioed plumber Mario and the perpetually endangered Princess Zelda. They and other Nintendo characters inhabit a closed world that requires anyone who wants to play a Nintendo game to have a Nintendo machine.
With the growing popularity of free mobile games, that stance has proved costly. The company lost ¥59.3 billion ($495 million) over the three fiscal years that ended in March 2014. Sales have decreased for five years in a row and in the latest year were down 70% from their peak in 2009; the steep decline in the yen helped Nintendo to a profit of ¥41.8 billion in the latest fiscal year. Today the machines have “virtually zero” value, Atul Goyal, an analyst in Singapore with Jefferies, told Bloomberg.
So now Nintendo is working on games that people can play on mobile devices, with no Nintendo hardware required. President Satoru Iwata has also gotten into the toy business; on May 7, he announced that Nintendo would work with Comcast NBC Universal’s Universal Studios theme parks to create attractions based on its characters. More changes are likely to come, including possible movie deals, Macquarie analyst David Gibson wrote in a report published on Friday.
If it all sounds a bit like the US company that built a theme-parks to video-games empire on the back of a mouse, it is. As it tries to capitalize on its trove of popular characters, Nintendo “can become something like Disney,” says Gerhard Fasol, chief executive officer of Eurotechnology Japan, a Tokyo consultancy. “They are basically creating a Disney-like ecosystem.”
Nintendo’s first big step outside its comfort zone was its move into the toy business last year, with the debut of Amiibo figurines, based on Nintendo characters, that can interact with games. The strategy is similar to that of rival Activision Blizzard, which has Skylanders, and to Disney Infinity toys that are based on characters from Disney’s Pixar, Marvel, and Walt Disney movies.
The more important change came in March, with the announcement that Nintendo would work with DeNA, a social media and game company based in Tokyo, to create games for mobile devices. The two have said they will have five titles by March 2017. The partnership gives Nintendo access to a growing market of mobile games that should top $45 billion by 2018, Bloomberg Intelligence analyst Jitendra Waral wrote in a report published on Wednesday.
While Nintendo’s modest step into toys didn’t do much to reassure investors—its stock price fell 10% last year, as Japan’s benchmark Topix index rose 8 percent—the company’s new strategy is a hit. The Tokyo-traded shares reached a 52-week high today of ¥22,220, a level they haven’t reached since early in 2011. Nintendo sounds pretty optimistic. It forecast on Thursday that operating income would double to ¥50 billion in the current fiscal year, although it’s worth noting that Nintendo has a history of over-exuberance when it comes to predicting its financial performance.
All the excitement is coming before Nintendo has proved it can succeed at this. Its first mobile game will be out by year- end, DeNA said, with “key talent” from both companies already working on it. It’s still unclear which characters the games will include. Macquarie’s Gibson notes that the producer of the popular Mario Kart game is among that talent lineup. While dribbling out some details of the DeNA plan, Nintendo isn’t saying much about its theme park dreams.
“This sort of endeavor to actively use Nintendo IP has been progressing,” Iwata said, in a statement.
Where does all this leave the company’s old business of selling its own game machines to run its own games?
Nintendo introduced its latest console, the Wii U, in 2013. Sales have been disappointing, according to Waral of Bloomberg Intelligence. Top franchises such as Halo and Grand Theft Auto aren’t available on the Wii U, leaving avid gamers to turn instead to the more powerful new versions of Sony’s PlayStation and Microsoft’s Xbox. Nintendo’s latest handheld device, the 3DS, is five years old and showing its age.
The company “is trying to offset the effects of weakening Wii U demand and smartphone competition by diversifying,” Waral wrote, but “gets most of its $5 billion sales from consoles and their games, a business it will have to protect as it pursues new sources of revenue.”
Macquarie’s Gibson differs, saying Nintendo should “give up its hardware ambitions and say we have three billion phones globally and it would be crazy not to focus on providing our strong IP games to them.”
That’s a step too far for Nintendo’s Iwata. Rather than jettison the hardware business, he’s got his people working on a new device, the NX. Nintendo can afford to stick with its game machines for a while, even as it pushes the Disney strategy. It has more than $8 billion in cash.